HC upholds RBI circular on additional tier bonds

CHENNAI: In a big blow to holders of ‘additional tier (AT1) bonds issued by Yes Bank, the Madras high court has upheld the legal validity of the Master circular-Basel III Capital Regulations issued by Reserve Bank of India (RBI) writing of the AT1 bonds, which are a type of unsecured, perpetual bonds that banks issue to shore up their capital.

Dismissing the plea moved by the Bokaria brothers along with their Hindu Undivided family in this regard, the first bench comprising Chief Justice AP Sahi and Justice Senthilkumar Ramamooorthy, said “The nature of A1 Tier Bonds did make an offer which made the petitioners mentally rich, but that was subject to a financial adventurous journey that was subject to risks and hazards that were attached with the nature of the transaction itself.”

“Their desire to be possessed of speculative wealth was circumscribed and hedged by lawful limitations that were not unknown to them or to commercial transactions of this nature. Any tinkering with the impugned circular on a liberal note may be not only against the present cause, but may have adverse impacts otherwise,” the bench said.

Further on pointing out that in the instant case, the petitioners having accepted the terms and conditions of issue cannot turn around and say that the conditions are unreasonable and the Master Circular suffers from manifest arbitrariness and unreasonableness, the bench said “This Court does not see as to how in a matter of investment, can the investor raise an issue of the absence of authority of law, when the bank itself while issuing the instrument of offer had made it clear that the power was available with the RBI to write-off the capital under the instrument, and the investments were made on such conditions existing.”

Also, on setting aside the petitioner’s argument that the investments are property and, therefore, writing-off the investment will violate Article 300A of the Constitution (No person shall be deprived of his property save by authority of law, the bench said “this is not an act of expropriation of property so as to attract Article 300A of the Constitution of India.

The Principal amount invested itself is capable of losing its value on its own even if the Master Circular is not applied. Thus, the challenge to the Master Circular on constitutional grounds is a challenge in vain.”

“The action taken by the Reserve Bank of India on the strength of the circular dated 1.7.2015 cannot be crucified on any constitutional ground, so as to pulverize the Master Circular and thereby nullifying the impact of a prompt action that has been taken in larger public interest by the RBI,” the bench added.

The petitioners had contended that the Master Circular is unconstitutional as it deprives them of their property and does so by invidiously discriminating between AT 1 Bonds, which are a form of debt, and other forms of debt. They also claimed that it also violates Article 14 because the AT 1 bond holders are discriminated against by other bond/debenture holders who are assured repayment of the debt under Section 71 of CA 2013.